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CMLS > SEC Filings for CMLS > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for CUMULUS MEDIA INC

Form 10-Q for CUMULUS MEDIA INC


29-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in this quarterly report. This discussion, as well as various other sections of this quarterly report, contains and refers to statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. Such statements relate to our intent, belief or current expectations primarily with respect to our future operating, financial and strategic performance. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties. Actual results may differ from those contained in or implied by the forward-looking statements as a result of various factors, including, but not limited to, risks and uncertainties relating to the need for additional funds to execute our business strategy, our inability to renew one or more of our broadcast licenses, changes in interest rates, our ability to complete any acquisitions pending from time to time, the timing, costs and synergies resulting from the integration of any completed acquisitions, our ability to eliminate certain costs, our ability to manage rapid growth, the popularity of radio as a broadcasting and advertising medium, changing consumer tastes, any material changes from the preliminary to final purchase price allocations in completed acquisitions, the impact of general economic conditions in the United States or in specific markets in which we currently do or expect to do business, industry conditions, including existing competition and future competitive technologies, cancellation, disruptions or postponements of advertising schedules in response to national or world events, our ability to generate revenue from new sources, including technology-based initiatives, the impact of regulatory rules or proceedings that may affect our business, or any acquisitions, from time to time, other risk factors described from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2013 and subsequently filed Forms 10-Q. Many of these risks and uncertainties are beyond our control, and the unexpected occurrence or failure to occur of any such events or matters could significantly alter our actual results of operations or financial condition.
For additional information about certain of the matters discussed and described in the following Management's Discussion and Analysis of Financial Condition and Results of Operations, including certain defined terms used herein, see the notes to the accompanying unaudited condensed consolidated financial statements included elsewhere in this quarterly report. Our Business
Our industry leading audio advertising platform reaches a weekly audience of over 259 million. We provide content and services to more than 10,000 radio stations, including its 460 owned and operated stations in 93 U.S. media markets, and operate a national streaming/mobile platform in partnership with digital audio provider Rdio.
Operating Overview
We believe that we have created a leading audio advertising platform with a true national platform to further leverage and expand upon our strengths, market presence and programming. Specifically we have an extensive radio station portfolio, including a presence in eight of the top 10 markets, and broad diversity in format, listener base, geography, advertiser base and revenue stream, designed to reduce our dependence on any single demographic, region or industry. Our nationwide platform generates premium content distributable through both broadcast and digital platforms. Our increased scale allows larger, significant investments in the local digital media marketplace enabling us to leverage our local digital platforms and strategies, including our social commerce initiatives across additional markets. We believe our national platform perspective will allow us to optimize our available advertising inventory while providing holistic and comprehensive solutions for our customers. Cumulus believes that our capital structure provides adequate liquidity and scale for Cumulus to operate and grow our current business, as well as pursue and finance potential strategic acquisitions in the future. Liquidity Considerations
Historically, our principal needs for funds have been for acquisitions of radio stations and networks, expenses associated with our station, network and corporate operations, capital expenditures, and interest and debt service payments. We believe that our funding needs in the future will be for substantially similar matters.
Our principal sources of funds have primarily been cash flow from operations and borrowings under credit facilities in existence from time to time. Our cash flow from operations is subject to such factors as shifts in population, station listenership, demographics, audience tastes, and fluctuations in preferred advertising media. In addition, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to us, which risks may be exacerbated in challenging economic


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periods. In recent periods, management has taken steps to mitigate this risk through heightened collection efforts and enhancements to our credit approval process, although no assurances as to the longer-term success of these efforts can be provided. In addition, we believe that our broad diversity in format, listener base, geography, advertiser base and revenue stream helps us to reduce our dependence on any single demographic, region or industry. We continually monitor our capital structure and from time to time have evaluated, and expect that we will continue to evaluate future opportunities to obtain, other public or private capital from the divestiture of radio stations or other assets that are not a part of, or do not complement, our strategic operations, as well as the issuance of equity and/or debt securities, in each case subject to market and other conditions in existence at the appropriate time. No assurances can be provided that any source of funds would be available when needed on terms acceptable to the Company, or at all.
In furtherance of our strategy, we have recently undertaken a number of transactions to further strengthen our balance sheet and improve our cash flows. On December 23, 2013, we entered into the Amended and Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement consists of a $2.025 billion term loan (the "Term Loan") maturing in December 2020 and a $200.0 million revolving credit facility (the "Revolving Credit Facility") maturing in December 2018. Under the Revolving Credit Facility, up to $30.0 million of availability may be drawn in the form of letters of credit. Upon entry into the Credit Agreement, we used Term Loan borrowings of $2.025 billion to repay in full all amounts outstanding under the first lien term loan and second lien term loan under our pre-existing credit agreements.
In the event amounts are outstanding under the Revolving Credit Facility or any letters of credit are outstanding that have not been collateralized by cash as of the end of each quarter, the Credit Agreement requires compliance with a consolidated first lien net leverage ratio covenant. The required ratio at March 31, 2014 was 5.75 to 1. The ratio periodically decreases until it reaches 4.00 to 1 on March 31, 2018. As of March 31, 2014, we were in compliance with all of our covenants under the Credit Agreement.
On December 6, 2013, we entered into a 5-year, $50.0 million revolving accounts receivable securitization facility (the "Securitization Facility") with General Electric Capital Corporation, as a lender, as swing line lender and as administrative agent (together with any other lenders party thereto from time to time, the "Lenders"). In connection with the entry into the Securitization Facility, pursuant to a Receivables Sale and Servicing Agreement, dated as of December 6, 2013 (the "Sale Agreement"), certain subsidiaries of the Company (collectively, the "Originators") sell and/or contribute their existing and future accounts receivable to a special purpose entity and wholly owned subsidiary of the Company (the "SPV"). The SPV may thereafter make borrowings from the Lenders, which borrowings are secured by those receivables, pursuant to a Receivables Funding and Administration Agreement, dated as of December 6, 2013 (the "Funding Agreement").
At March 31, 2014, our long-term debt consisted of $2.019 billion outstanding under the Term Loan and $610.0 million in 7.75% Senior Notes.
We have assessed the current and expected business climate, our current and expected needs for funds and our current and expected sources of funds and determined, based on our financial condition as of March 31, 2014, that cash on hand, cash expected to be generated from operating activities and cash expected to be available from various financing sources will be sufficient to satisfy our anticipated financing needs for working capital, capital expenditures, interest and debt service payments, and any repurchases of securities and other debt obligations through at least March 31, 2015. Advertising Revenue and Adjusted EBITDA
Our primary source of revenues is the sale of advertising time. Our sales of advertising time are primarily affected by the demand from local, regional and national advertisers which impacts the advertising rates charged by us. Advertising demand and rates are based primarily on the ability to attract audiences in the demographic groups targeted by its advertisers, as measured principally by various ratings agencies on a periodic basis. We endeavor to develop strong listener loyalty and we believe that the diversification of our formats and programs helps to insulate us from the effects of changes in the musical tastes of the public with respect to any particular format as a substantial portion of our revenue comes from non-music format and proprietary content. In addition, we believe that the platform that we own and operate, which has increased diversity in terms of format, listener base, geography, advertiser base and revenue stream as a result of our acquisitions and the development of our strategy to focus on radio stations in larger markets and geographically strategic regional clusters, will further reduce our revenue dependence on any single demographic, region or industry.
We strive to maximize revenue by managing our on-air inventory of advertising time and adjusting prices up or down based on supply and demand. The optimal number of advertisements available for sale depends on the programming format of a particular radio program. Each sales vehicle has a general target level of on-air inventory available for advertising. This target level of advertising inventory may vary at different times of the day but tends to remain stable over time. We seek to broaden our base of advertisers in each of our markets by providing a wide array of audience demographic segments across each cluster


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of stations, thereby providing each of our potential advertisers with an effective means of reaching a targeted demographic group. In the broadcasting industry, we sometimes utilize trade or barter agreements that exchange advertising time for goods or services such as travel or lodging, instead of for cash. Trade revenue totaled $9.4 million and $4.9 million for the three months ended March 31, 2014 and 2013, respectively. Our advertising contracts are generally short-term. We generate most of our revenue from local and regional advertising, which is sold primarily by a station's sales staff. Local and regional advertising typically represents a majority of our net revenues. In addition to local advertising revenues, we monetize our available inventory in both national spot and network sales marketplaces using our national platform. To effectively deliver our network advertising for our customers, we distribute content and programming through third party affiliates in order to achieve a broader national audience. Typically, in exchange for the right to broadcast radio network programming, third party affiliates remit a portion of their advertising time, which is then aggregated into packages focused on specific demographic groups and sold by us to our advertiser clients that want to reach the listeners who comprise those demographic groups on a national basis. Revenues derived from third party affiliates represented less than 10% of consolidated revenues in all periods presented.
Our advertising revenues vary by quarter throughout the year. As is typical with advertising revenue supported businesses, our first calendar quarter typically produces the lowest revenues of a last twelve month period, as advertising generally declines following the winter holidays. The second and fourth calendar quarters typically produce the highest revenues for the year. Our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on revenue generation until future periods, if at all. We continually evaluate opportunities to increase revenues through new platforms, including technology-based initiatives. Adjusted EBITDA is the financial metric utilized by management to analyze the cash flow generated by our business. This measure isolates the amount of income generated by our core operations after the incurrence of corporate, general and administrative expenses. Management also uses this measure to determine the contribution of our core operations, including the corporate resources employed to manage the operations, to the funding of our other operating expenses and to the funding of debt service and acquisitions. In addition, Adjusted EBITDA is a key metric for purposes of calculating and determining our compliance with certain covenants contained in our credit facility.
In deriving this measure, management excludes depreciation, amortization, and stock-based compensation expense, as these do not represent cash payments for activities directly related to the operation of the core operations. In addition, we exclude LMA fees from our calculation of Adjusted EBITDA, even though these items require a cash settlement, because they are excluded from the definition of Adjusted EBITDA contained in our Credit Agreement. Management excludes any gain or loss on the exchange or sale of any assets as it does not represent a cash transaction. Management also excludes any gain or loss on derivative instruments as it does not represent a cash transaction nor are they associated with core operations. Expenses relating to acquisitions and restructuring costs are also excluded from the calculation of Adjusted EBITDA as they are not directly related to our core operations. Management excludes any impairment of goodwill and intangible assets as they do not require a cash outlay.
Management believes that Adjusted EBITDA, although not a measure that is calculated in accordance with GAAP, nevertheless is commonly employed by the investment community as a measure for determining the market value of a media company. Management has also observed that Adjusted EBITDA is routinely employed to evaluate and negotiate the potential purchase price for media companies and is a key metric for purposes of calculating and determining compliance with certain covenants in our credit facility. Given the relevance to our overall value, management believes that investors consider the metric to be extremely useful.
Adjusted EBITDA should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with GAAP.
A quantitative reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, follows in this section.

Results of Operations
The following analysis of selected data from our unaudited condensed consolidated statements of operations and other supplementary data should be referred to while reading the results of operations discussion that follows (dollars in thousands):


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                                                    Three Months Ended March 31,
                                                      2014                 2013           % Change
STATEMENT OF OPERATIONS DATA:
Net revenues                                    $      292,044       $      217,839          34.1  %
Content costs                                          108,493               61,951          75.1  %
Other direct operating expenses                        115,335               93,480          23.4  %
Depreciation and amortization                           28,881               27,596           4.7  %
LMA fees                                                 1,557                  946          64.6  %
Corporate expenses (including stock-based
compensation expense)                                   19,194               14,018          36.9  %
(Gain) loss on sale of assets or stations                 (538 )              1,309        (141.1 )%
Gain on derivative instrument                                -                 (738 )      (100.0 )%
Operating income                                        19,122               19,277          (0.8 )%
Interest expense, net                                  (35,934 )            (44,252 )       (18.8 )%
Other expense, net                                         (65 )                287        (122.6 )%
Loss from continuing operations before income
taxes                                                  (16,877 )           (24,688)         (31.6 )%
Income tax benefit (expense)                             7,608               (1,975 )      (485.2 )%
Loss from continuing operations                         (9,269 )           (26,663)         (65.2 )%
Income from discontinued operations, net of
taxes                                                        -               17,675        (100.0 )%
Net loss                                        $       (9,269 )     $       (8,988 )         3.1  %
OTHER DATA:
Adjusted EBITDA                                 $       58,745       $       53,444           9.9  %

Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013
Net Revenues
Net revenues for the three months ended March 31, 2014 increased $74.2 million, or 34.1%, to $292.0 million, compared to $217.8 million for the three months ended March 31, 2013. The increase resulted from increases of $63.6 million, $5.2 million, $1.3 million and $4.1 million in broadcast advertising, digital advertising, political advertising and license fees and other revenue, respectively. These increases were primarily attributable to the addition of the operations of WestwoodOne, which was acquired by the Company in December 2013. Content Costs
Content costs consist of all costs related to the licensing, acquisition and development of our programming.
The following table presents our content costs as a percentage of total net revenues for the periods presented:

Three Months Ended March 31,
2014 2013
Content costs 37.1 % 28.4 %

Content costs for the three months ended March 31, 2014 increased $46.5 million, or 75.1%, to $108.5 million, compared to $62.0 million for the three months ended March 31, 2013. This increase was primarily attributable to the addition of the operations of WestwoodOne, in addition to expenses related to our local and national content initiatives, including our NASH country brand. Other Direct Operating Expenses
Other direct operating expenses consist of expenses related to the distribution and monetization of our content across our platform and overhead expenses. Other direct operating expenses for the three months ended March 31, 2014 increased $21.9 million, or 23.4%, to $115.3 million, compared to $93.5 million for the three months ended March 31, 2013. This increase was primarily attributable to the


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addition of the operations of WestwoodOne in addition to an increase in variable selling costs associated with our increase in revenue. Depreciation and Amortization
Depreciation and amortization for the three months ended March 31, 2014 increased $1.3 million, or 4.7%, to $28.9 million, compared to $27.6 million for the three months ended March 31, 2013. This increase was due to a $1.8 million increase in depreciation expense which was primarily attributable to expense related to the assets of WestwoodOne, offset by a $0.5 million decrease in amortization expense on our definite lived intangible assets, which resulted from the accelerated amortization methodology we have applied since acquisition of these assets that is based on the expected pattern in which the underlying assets' economic benefits are consumed.
Corporate Expenses, Including Stock-based Compensation Expense Corporate expenses consist primarily of compensation and related costs for our executive, finance, human resources, information technology and legal personnel and fees for professional services. Professional services are principally comprised of outside legal, audit and consulting services.
Corporate expenses, including stock-based compensation expense, for the three months ended March 31, 2014 increased $5.2 million, or 36.9%, to $19.2 million, compared to $14.0 million for the three months ended March 31, 2013. This increase is primarily due to an increase of $4.2 million in acquisition related restructuring expenses, legal costs related to the WestwoodOne acquisition and a $1.4 million increase in stock-based compensation expense, partially offset by a $0.4 million decrease in other overhead costs. Interest Expense, net
Total interest expense, net of interest income, for the three months ended March 31, 2014 decreased $8.3 million, or 18.8%, to $35.9 million compared to $44.3 million for the three months ended March 31, 2013. Interest expense associated with outstanding debt decreased by $7.8 million to $21.8 million as compared to $29.7 million in the prior year period. This decrease was due to lower average indebtedness outstanding resulting from principal repayments and a lower weighted average cost of debt due to the December 2013 entry into the Credit Agreement.
The following summary details the components of our interest expense, net of interest income (dollars in thousands):

                                        Three Months Ended March 31,              2014 vs 2013
                                           2014               2013           $ Change       % Change
7.75% Senior Notes                   $      11,819       $      11,819     $        -             -  %
Bank borrowings - term loans and
revolving credit facilities                 21,840              29,680         (7,840 )       (26.4 )%
Other including debt cost
amortization                                 2,606               3,018           (412 )       (13.7 )%
Change in fair value of interest
rate cap                                         -                   5             (5 )      (100.0 )%
Interest income                               (331 )              (270 )          (61 )        22.6  %
Interest expense, net                $      35,934       $      44,252     $   (8,318 )       (18.8 )%

Income Taxes
For the three months ended March 31, 2014, the Company recorded an income tax benefit of $7.6 million on a pre-tax loss from continuing operations of $16.9 million, resulting in an effective tax rate for the three months ended March 31, 2014 of approximately 45.0%. For the three months ended March 31, 2013, the Company recorded an income tax expense of $2.0 million on a pre-tax loss from continuing operations of $24.7 million, resulting in an effective tax rate for the three months ended March 31, 2013 of approximately (8.0)%.
The difference between the effective tax rate and the federal statutory rate of 35.0% for the three months ended March 31, 2014 primarily relates to state and local income taxes and changes in the valuation allowance on certain separate company filing jurisdiction net operating losses. For the three months ended March 31, 2013, the primary differences between the effective tax rate and federal statutory rate of 35.0% relate to state and local income taxes, tax amortization of broadcast licenses and goodwill, changes in the valuation allowance on net deferred tax assets as well as the application of the exception to the intra-period allocation tax accounting rules in accordance with ASC Topic 740, Accounting for Income Taxes ("ASC Topic 740") between continuing and discontinued operations which requires that continuing operations benefits from the lesser


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of the tax provision associated with discontinued operations or the overall provision on continuing operations. We believe our annual effective tax rate before discrete items for fiscal year 2014 will be approximately 39.0%. The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be recognized in accordance with ASC Topic 740.
As of March 31, 2014, the Company has a valuation allowance of $18.9 million related to certain net operating loss carryforwards for which the Company does not believe their recovery to meet the more likely than not recognition standard. As of March 31, 2013, the Company continues maintained a full valuation allowance on its net deferred tax assets excluding deferred tax liabilities associated with the Company's indefinite lived intangible assets and deferred cancellation of debt income for which no estimated amount of deferred tax assets are available to satisfy. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in the Company's financial statements or tax returns as well as future profitability.
Adjusted EBITDA
As a result of the factors described above, on an as reported basis, Adjusted EBITDA for the three months ended March 31, 2014 increased $5.3 million to $58.7 million from $53.4 million for the three months ended March 31, 2013. Reconciliation of Non-GAAP Financial Measure The following table reconciles Adjusted EBITDA to net loss (the most directly comparable financial measure calculated and presented in accordance with GAAP) as presented in the accompanying consolidated statements of operations (dollars in thousands):

                                                             Three Months Ended March 31,
                                                           2014          2013         %Change
Net loss                                               $   (9,269 )   $  (8,988 )        (3.1 )%
Income tax benefit                                         (7,608 )       1,975         485.2  %
Non-operating expenses, including net interest expense     35,999        43,965         (18.1 )%
LMA fees                                                    1,557           946          64.6  %
Depreciation and amortization                              28,881        27,596           4.7  %
Stock-based compensation expense                            4,091         2,663          53.6  %
. . .
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